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Fitch lowers growth forecasts for China and India
By Fitch Ratings |
October 9, 2012, Tuesday
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Print Edition
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FITCH Ratings has cut its 2012 growth forecasts for China to 7.8 percent from 8 percent and India to 6 percent from 6.5 percent. Both regional giants face a deteriorating global growth outlook with diminished willingness or capacity to respond with domestic policy loosening, compared with 2009.
Slower exports are weighing on China's growth, but Fitch views the slowdown as also reflecting the authorities' efforts to squeeze consumer and house-price inflation out of the system after the strong credit-led stimulus of 2009-2010.
Fitch expects slowing construction activity to knock about 0.8 percentage points off China's growth in 2012. The agency expects only marginal policy loosening unless the labour market deteriorates sharply.
Fitch does not expect a "hard landing" in China given the authorities' scope for fiscal and monetary policy flexibility if they choose to use it. The resilience of the labor market seen in current data suggests growth of 7.5-8 percent may be in line with the economy's potential rate.
Weak corporate profitability poses downside risk for China's economy. This could eventually incline firms to shed labor which would in turn affect consumption, currently a resilient part of the outlook. Real estate and construction have been a source of downside risk given the authorities' restrictive policies in the sector following its rapid growth in 2009-2011.
However, the residential real estate market has shown some signs of turning the corner in summer 2012, which leans against a negative outcome. A significant deterioration in financial stability and in the ability of the banks to transmit monetary loosening is another but more remote risk to the outlook.
India's economic outlook remains challenging. Investment rose just 0.7 percent year on year in the second quarter, with higher-frequency indicators pointing to another weak outturn in the third quarter. Ongoing concerns over government economic and investment policy may be weighing on business confidence. The authorities' ability to respond with looser policy is constrained by India's high inflation, fiscal deficit and public debt.
Fitch projects India's general government deficit at 8.5 percent of GDP in fiscal 2012, leaving little room for fiscal easing. A number of quarters of weak investment, in turn, may be starting to affect the economy's supply capacity, pointing to a weaker growth outlook.
Restoring confidence
The authorities have announced a range of reforms in September 2012 including liberalization of FDI in multi-brand retail which may help to restore confidence and lift investment, although the volatile political environment points to implementation risk.
The growth outlook is holding up better elsewhere in emerging Asia in part because of the growing importance of domestic demand in many regional economies.
The 0.3 percentage point reduction in South Korea's forecast for 2012 to 2.5 percent is modest and underpins the open, trade-driven economy's resilience, a key factor behind Fitch's upgrade of the Korean sovereign to "AA-" in September.
Growth in Malaysia and Thailand will benefit in the short run from public-sector-led investment. Indonesia's growth forecast is unchanged at 6 percent, reflecting the increasing importance of domestic demand as a driver of that country's growth, notwithstanding the importance of commodity exports.
Fitch has already cut its forecast for growth in the world's major advanced economies by 0.2 percentage point in 2012 (to 1 percent) and 0.3 percentage point in 2013 (to 1.4 percent).
Slower exports are weighing on China's growth, but Fitch views the slowdown as also reflecting the authorities' efforts to squeeze consumer and house-price inflation out of the system after the strong credit-led stimulus of 2009-2010.
Fitch expects slowing construction activity to knock about 0.8 percentage points off China's growth in 2012. The agency expects only marginal policy loosening unless the labour market deteriorates sharply.
Fitch does not expect a "hard landing" in China given the authorities' scope for fiscal and monetary policy flexibility if they choose to use it. The resilience of the labor market seen in current data suggests growth of 7.5-8 percent may be in line with the economy's potential rate.
Weak corporate profitability poses downside risk for China's economy. This could eventually incline firms to shed labor which would in turn affect consumption, currently a resilient part of the outlook. Real estate and construction have been a source of downside risk given the authorities' restrictive policies in the sector following its rapid growth in 2009-2011.
However, the residential real estate market has shown some signs of turning the corner in summer 2012, which leans against a negative outcome. A significant deterioration in financial stability and in the ability of the banks to transmit monetary loosening is another but more remote risk to the outlook.
India's economic outlook remains challenging. Investment rose just 0.7 percent year on year in the second quarter, with higher-frequency indicators pointing to another weak outturn in the third quarter. Ongoing concerns over government economic and investment policy may be weighing on business confidence. The authorities' ability to respond with looser policy is constrained by India's high inflation, fiscal deficit and public debt.
Fitch projects India's general government deficit at 8.5 percent of GDP in fiscal 2012, leaving little room for fiscal easing. A number of quarters of weak investment, in turn, may be starting to affect the economy's supply capacity, pointing to a weaker growth outlook.
Restoring confidence
The authorities have announced a range of reforms in September 2012 including liberalization of FDI in multi-brand retail which may help to restore confidence and lift investment, although the volatile political environment points to implementation risk.
The growth outlook is holding up better elsewhere in emerging Asia in part because of the growing importance of domestic demand in many regional economies.
The 0.3 percentage point reduction in South Korea's forecast for 2012 to 2.5 percent is modest and underpins the open, trade-driven economy's resilience, a key factor behind Fitch's upgrade of the Korean sovereign to "AA-" in September.
Growth in Malaysia and Thailand will benefit in the short run from public-sector-led investment. Indonesia's growth forecast is unchanged at 6 percent, reflecting the increasing importance of domestic demand as a driver of that country's growth, notwithstanding the importance of commodity exports.
Fitch has already cut its forecast for growth in the world's major advanced economies by 0.2 percentage point in 2012 (to 1 percent) and 0.3 percentage point in 2013 (to 1.4 percent).
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